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One month after the presidential election, taxpayers are learning more about President-elect Donald Trump’s tax proposals for his administration. Although exact details, including legislative language, are likely months away, taxpayers have a snapshot of the president-elect’s tax proposals for individuals and businesses.

One month after the presidential election, taxpayers are learning more about President-elect Donald Trump’s tax proposals for his administration. Although exact details, including legislative language, are likely months away, taxpayers have a snapshot of the president-elect’s tax proposals for individuals and businesses.

Note. At the time this article was prepared, the primary descriptions of President-elect Trump’s tax proposals are on his campaign and transition websites. The materials on these websites are not the same as legislation, which would amend the Tax Code. Rather, they discuss the President-elect’s tax proposals in very general and broad language.

Tax reform

Tax reform has been a regular topic in recent years. While numerous tax reform proposals were unveiled during the Obama administration, an overhaul of the Tax Code remained elusive. President Obama released a tax reform framework that called for a reduction in the corporate tax rate in exchange for the elimination of some energy tax preferences and other unspecified business tax preferences. Former House Ways and Means Chair Dave Camp, R-Mich., made a detailed tax reform proposal several years ago. Many members of Congress have also introduced tax reform bills. The election of Trump, along with GOP majorities in the House and Senate, is expected to give momentum to tax reform in 2017.

Proposals

During the campaign, President-elect Trump described a number of tax reform proposals, including (not an exhaustive list):

Reduce the number of individual income tax rates from seven to three with rates at 12, 25 and 33 percent

Eliminate the alternative minimum tax (AMT) for individuals and businesses

Create new Dependent CARE Savings accounts

Provide “spending rebates” for lower-income taxpayers for childcare expenses through the earned income tax credit (EITC)

Increase standard deduction to $15,000 for single individuals and $30,000 for married couples filing a joint return

Enhance Code Sec. 179 small business expensing

Reduce the top corporate tax rate to 15 percent

Tax carried interest as ordinary income

Eliminate head of household filing status

Cap itemized deductions for higher-income taxpayers

Affordable Care Act

The Affordable Care Act (ACA) includes a number of taxes, such as the excise tax on medical devices and the excise tax on high-dollar health insurance plans (often called the “Cadillac plan” tax), the net investment income (NII) tax, and the additional Medicare tax. The ACA also created new health-related tax incentives, including the Code Sec. 36B premium assistance tax credit and the Code Sec. 45R small employer health insurance tax credit.

During the campaign, President-elect Trump proposed to repeal the ACA. Post-election, it appears that the president-elect is open to retaining some of the ACA. The president-elect has mentioned coverage for children under age 26 as one provision of the ACA that he views favorably.

Congress

The 115th Congress will convene in January. Republicans have majorities in the House and Senate. Being the majority means that Republicans will chair the tax writing committees in the 115th Congress: the House Ways and Means Committee and the Senate Finance Committee.

Looking to 2017, tax reform legislation will likely have its start in the House Ways and Means Committee. In the House, Republicans have already unveiled a tax reform blueprint. There are similarities between the House GOP blueprint and President-elect Trump’s tax proposals. For example, both call for reducing the federal income tax rates for individuals along with lowering the corporate tax rate.

Please contact our office if you have any questions about these or any other tax proposals. Our office will keep you posted of developments.

The likelihood exists that federal tax-cut legislation will become law sometime in 2017. Nevertheless, the possibility also remains that comprehensive tax legislation may be delayed until 2018 either because of difficult negotiations or intervening events, or it could eventually even get tabled indefinitely, except for a few provisions, if momentum turns to other matters. The contents of a tax bill, too, can vary – from a compromise between the House GOP’s “Better Way” blueprint and President-elect Trump’s tax plan as set forth during his campaign—to a significantly rewritten version if Senate Democrats and fiscally conservative House and Senate members are able to gain seats at the negotiating table.

The likelihood exists that federal tax-cut legislation will become law sometime in 2017. Nevertheless, the possibility also remains that comprehensive tax legislation may be delayed until 2018 either because of difficult negotiations or intervening events, or it could eventually even get tabled indefinitely, except for a few provisions, if momentum turns to other matters. The contents of a tax bill, too, can vary – from a compromise between the House GOP’s “Better Way” blueprint and President-elect Trump’s tax plan as set forth during his campaign—to a significantly rewritten version if Senate Democrats and fiscally conservative House and Senate members are able to gain seats at the negotiating table.

What should a taxpayer do now, before the 2016 tax year ends, to take advantage of possible tax reduction in 2017 and beyond, without painting him or herself into a corner if tax changes of the type anticipated are not realized either retroactively to January 1, 2017, or not at all in the magnitude now being discussed? The first assumption that needs to be made in such a year-end strategy is whether any legislation in 2017 will be retroactive to January 1, 2017, thus providing more of an incentive to deferring taxable income into 2017 and beyond and accelerating deductions into 2016. If 2017 tax legislation only provides a mid-year tax cut, or is approved close enough to 2018 to delay any benefit until 2018, efforts at the end of 2016 to lower 2016 taxable income at the expense of raising 2017 taxable income disproportionately to 2016, can end up costing the taxpayer overall tax dollars.

Year-end strategies

As with prior years, 2016 year-end planning should start with data collection and a review of prior year returns. This includes losses or other carryovers, estimated tax installments, and items that were unusual. Conversations about next year should include review of any plans for significant purchases or dispositions, as well as any possible life cycle plans. If the general goal for year-end planning has been to balance taxable income between the current and upcoming year to the extent tax bracket rates are equal, planning at year-end 2016 presents a choice between using the new Trump/House Blueprint rates as a target or a more conservative approach that moves more taxable income beyond an ideal balance into 2017, but not necessarily counting on a final tax bill arriving at a 15, 28 and 33 percent rate structure for individuals; and a 15 or 25 percent rate level for businesses, depending upon the Trump or House blueprint versions. Within those goals, use of traditional techniques to delay income recognition into 2017 and beyond or to accelerate deductions into 2016 have particular relevance at year end 2016.

The following income deferral techniques, among others, might be considered:

Installment contracts. Income on a sale reported under the installment method is realized pro-rata over the years in which the installment payments are made, under the tax laws applicable during those future years. This technique is particularly valuable if tax cuts are not made effective immediately in 2017 since installment payments in 2018 and beyond are all the more likely to be subject to lower tax rates.

Bonuses. If an employer can be persuaded to delay paying out a bonus at year end until up to 2 ½ months into 2017, the employee will be taxed in 2017. For this strategy to work, however, the deferral must be made before the bonus is due and payable; and, generally, the bonus must be paid within the first 2 ½ months in 2017 to avoid tripping over the nonqualified deferred compensation rules.

Billing for services. Cash-basis taxpayers in the business of providing services might consider delaying the recognition of service income at year end by billing out late in the year or even into early 2017 for those services performed in late 2016.

U.S. Savings Bonds. For cash-basis taxpayers, interest on series E, EE and I bonds is generally taxed at the earliest of disposition, redemption or final maturity of the bond (however, the taxpayer can elect to report the interest as it accrues).

Debt forgiveness income. Determination of the time of debt forgiveness requires a practical assessment of the facts and circumstances relating to the likelihood of payment. Convincing the lender to postpone issuing a Form 1099-C, Cancellation of Debt, until the 2017 tax year, might form part of the process. Note that IRS final regulations in early November (T.D. 9793) removed the rule under which a deemed discharge of indebtedness, reportable on Form 1099-C, occurs at the expiration of a 36-month nonpayment testing period.

Like-kind exchanges. Taxpayers who want to delay recognition of income on the sale of business or investment property should consider a like-kind exchange conforming to Code Sec. 1031. Proposals to limit to use of like-kind deferral to $1 million, and exclude art and collectibles from like-kind treatment, may be under consideration in the future, but are not applicable at the very least to 2016.

First-year required minimum distributions. Individuals who first reached age 70 ½ in 2016 can delay taking required minimum distributions (RMDs) from qualified retirement plans otherwise due in 2016 until 2017. Of course, they will then be required to double-up in 2017 and take distributions for 2016 and 2017 in 2017.

Roth IRA conversions. Conversions from traditional IRAs to Roth IRAs are taxable in the year of conversion. Individuals therefore should consider delaying conversions into 2017. Individuals who already converted to Roth IRAs in 2016 can reconvert back into a traditional IRA by year-end 2016 and avoid any 2016 income recognition. A follow up conversion, however, would then generally not be permitted for at least 30 days.

The following deduction acceleration techniques, among others, might also be considered:

Bunch itemized deductions into 2016. This traditional technique designed to maximize both itemized deductions and the standard deduction may have even greater benefits since Trump has proposed a significant increase in the standard deduction to $15,000 for single taxpayers and $30,000 for joint filers. In addition, it may be more difficult for higher-income taxpayers to claim itemized deductions under a Trump proposal that would impose a dollar cap itemized deductions.

Don’t delay deductible payments until 2017. Paying medical bills (and accelerating elective medical treatment), making charitable contributions, paying the last state estimated tax installment, are among time-tested techniques now elevated in importance to maximize itemized deductions. Taxpayers can write a check or can charge an item by credit card and treat these actions as payments.

Each new filing season may bring changes to the Form 1040, U.S. Individual Income Tax Return, as well as draft instructions for Form 1040 and any related Schedules, and this year is of no exception. The following highlights some of the changes to 2016 Form 1040, its Schedules and other Forms, which can be found on the IRS website at www.irs.gov. The draft Form 1040 and Instructions are expected to track what will appear in the final Form 1040 and Instructions this year since "tax extenders" common to past years have either been made permanent or run through 2016. Any year-end tax legislation from Congress likely will have a prospective impact only, into tax year 2017 and beyond.

Each new filing season may bring changes to the Form 1040, U.S. Individual Income Tax Return, as well as draft instructions for Form 1040 and any related Schedules, and this year is of no exception. The following highlights some of the changes to 2016 Form 1040, its Schedules and other Forms, which can be found on the IRS website at www.irs.gov. The draft Form 1040 and Instructions are expected to track what will appear in the final Form 1040 and Instructions this year since "tax extenders" common to past years have either been made permanent or run through 2016. Any year-end tax legislation from Congress likely will have a prospective impact only, into tax year 2017 and beyond.

Filing deadline

The filing deadline for 2016 individual income tax returns moves to Tuesday, April 18, 2017, because of the Emancipation Day holiday in the District of Columbia. As with previous filing seasons, taxpayers are afforded an automatic six-month extension by either filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, or by making an electronic payment.

Additional payment methods

The 2016 Draft 1040 Instructions describes the IRS mobile application, IRS2GO, through which taxpayers can access “Direct Pay” or “Pay By Card” options. In addition, there is a new option for taxpayers who wish to pay their taxes in person with cash. The option is provided through retailers who have partnered with the IRS. In-person cash payments are limited to a maximum of $1,000 per day per transaction; in addition, there is a fee associated with in-person cash payments.

Delayed refunds for certain credits

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) generally requires that no credit or refund for an overpayment for a tax year will be made to a taxpayer before the 15th day of the second month following the close of that tax year, if the taxpayer claimed the earned income tax credit (EITC) or additional child tax credit on the return. This provision in the PATH Act applies to credits or refunds made after December 31, 2016. Some taxpayers may find that they will not receive any refund until after February 15, 2017.

Health coverage

The Affordable Care Act (ACA) requires all individuals to either carry minimum essential health coverage, unless exempt, or make shared responsibility payments. For 2016, the shared responsibility payment has increased compared to 2015. The 2016 shared responsibility payment will be the higher of: (1) 2.5 percent of the taxpayer’s annual household income above the tax filing threshold, capped at the national average of the bronze plan premium, or (2) $695 per adult and $347.50 per child under the age of 19 to a family maximum penalty of $2,085.

The health coverage tax credit (HCTC) is a tax credit that pays a percentage of health insurance premiums for eligible taxpayers and qualifying family members. This is a separate credit from the Code Sec. 36B premium assistance tax credit and has its own eligibility requirements. Some taxpayers may have received advance HCTC payments beginning in July 2016. Instructions for Form 8885 provide more detail for the HCTC, including how to report advance payments.

IRA deduction

For 2016, if a taxpayer was covered by a retirement plan at work, and his or her filing status is single or head of household, and his or her modified adjusted gross income (MAGI) is equal to, or less than, $61,000, the traditional IRA contribution is fully deductible. Further, taxpayers whose MAGI is more than $61,000 but less than $71,000 (more $98,000 but less than $118,000 if married filing jointly or qualifying widow(er)) are entitled to a reduced deduction. However, if a taxpayer’s spouse was covered by a retirement plan, but the taxpayer was not, the taxpayer’s IRA contribution may be fully deductible if the MAGI is less than $194,000.

Deductions and exemptions

The 2016 standard deduction for single filers and married individuals filing separately is $6,300. For married filers and qualifying widow(er)s, the deduction is $12,600. For heads of household, the standard deduction is $9,300.

Itemized deductions for taxpayers with adjusted gross income above certain amounts may be reduced. The applicable amounts are $259,400 for single individuals, $411,300 for married individuals filing jointly or a surviving spouse, $155,650 for married couples filing separate returns, and $285,350 for heads of household.

The 2016 exemption amount is $4,050 per exemption, slightly increased from 2015’s exemption amount of $3,950. However, phaseout occurs when adjusted gross income (AGI) is greater than $311,300 for married individuals filing jointly or widow(er)s, $285,350 for heads of household, $259,400 for single filers, and $155,650 for married individuals filing separately.

Virtual currency – often referred to as ‘bitcoin” -- is a mystery for many people but an everyday currency for others. As virtual currency grows in popularity, questions arise about its taxation. The IRS treats virtual currency as property and not as currency. This means that general tax principles that apply to property transactions apply to transactions using virtual currency.

Virtual currency – often referred to as ‘bitcoin” -- is a mystery for many people but an everyday currency for others. As virtual currency grows in popularity, questions arise about its taxation. The IRS treats virtual currency as property and not as currency. This means that general tax principles that apply to property transactions apply to transactions using virtual currency.

Virtual currency

Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account or a store of value. Many types of virtual currencies have been created recently for use in lieu of currency issued by a government to purchase goods and services in the real economy. Bitcoin is one example.

A 2015 federal government report described how virtual currency is generally obtained. An individual can exchange conventional money for virtual currency a fee on an online exchange. An individual can obtain virtual currency in exchange for the sale of goods or services. An individual can also acquire virtual currency by serving as “miner.” This approach requires significant computer’s processing power.

Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. While virtual currency may operate like “real” money, it does not have legal tender status in the U.S.

IRS guidance

In Notice 2014-21, the IRS announced that it will treat virtual currency as property. The IRS explained that transactions using virtual currency must be reported in U.S. dollars for U.S. tax purposes. Taxpayers must determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt. If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars (or into another real currency which in turn can be converted into U.S. dollars) at the exchange rate, in a reasonable manner that is consistently applied, the IRS explained.

More guidance possibly coming

In November 2016, the Treasury Inspector General for Tax Administration (TIGTA) asked the IRS review its approach to virtual currency. The IRS has established a virtual currency task force but TIGTA reported that the IRS could better coordinate some of its intra-agency activities. TIGTA also found that the while employers and businesses are required to report taxable virtual currency transactions, current third-party information reporting documents did not provide the IRS with any means to ascertain whether the taxable transaction amounts being reported were specifically related to virtual currencies.

TIGTA recommended that the IRS provide updated virtual currency guidance. TIGTA also recommended that the IRS revise third-party information reporting documents to identify the amounts of virtual currencies used in taxable transactions. The IRS agreed with the recommendations. The IRS did not identify when more guidance may be issued. Our office will keep you posted of developments.

Child care can undoubtedly prove to be a costly expense for any taxpayer. In some instances, taxpayers must weigh whether the cost of child care is a deterrent to returning, or, in some cases, entering the workforce. Although the IRS may not be able to control market prices of child care options, it does offer a credit that can lessen the burden that child care costs may have on the budget of working parents.

Child care can undoubtedly prove to be a costly expense for any taxpayer. In some instances, taxpayers must weigh whether the cost of child care is a deterrent to returning, or, in some cases, entering the workforce. Although the IRS may not be able to control market prices of child care options, it does offer a credit that can lessen the burden that child care costs may have on the budget of working parents.

The IRS offers what is known as a child care credit, which is a tax break for working parents. The credit, in effect, returns a portion of the money that a taxpayer spends on child care, which can then lead to a reduction in overall tax liability by hundreds or thousands of dollars, circumstances depending. Unlike many other tax breaks that have income limits, a taxpayer may claim the child care credit regardless of income, although the credit decreases as income levels increase.

Requirements

Generally, in order to qualify for the child care credit, an individual, or his or her spouse, must:

Have a child that meets certain qualifications;

Have earned income that came from employment or self-employment, unless a full-time student or disabled individual;

Have a filing status that is single, married filing jointly, head of household, or qualifying widow(er) with a dependent child; and

Have paid for child care from a provider who meets certain qualifications.

There are many nuances to the list of requirements for the credit. Any taxpayer who considers claiming the credit should take stock and ensure they meet the requirements.

Determining the amount of the credit

The amount of the child care credit that a taxpayer is entitled to is based on both a taxpayer’s income as well as the amount that a taxpayer paid in child care for the tax year. That is, the amount of the credit is determined based on a percentage of the employment-related expenses paid by the taxpayer during the tax year. Such expenses are subject to the earned income limit, as well as the dollar limit. In addition, the credit percentage is based on the taxpayer’s adjusted gross income. As the credit is nonrefundable, the credit is limited to the amount of your tax liability.

A taxpayer is to add the total for care expenses that qualify for the credit. The maximum that a taxpayer may claim for care expenses is $3,000 for one qualifying child, or $6,000 for one or more qualifying children. The taxpayer is to then subtract any money provided by an employer for child care expenses.

The credit that a taxpayer can claim is a percentage of the allowable expenses based on the taxpayer’s adjusted gross income. The IRS provides a chart to help determine the percentage. The percentage may fall between 20 percent and 35 percent. Thus, for purposes of calculating the federal tax credit for child and dependent care: maximum work-related expenses of $3,000 ($6,000 if 2 or more qualifying individuals) × applicable percentage (35% if AGI of $15,000 or less; percentage reduced 1% for each $2,000 of AGI over $15,000; 20% if AGI of $43,000 or more). Maximum credit: $1,050 ($2,100 for 2 or more).

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important federal tax reporting and filing data for individuals, businesses and other taxpayers for the month of December 2016.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important federal tax reporting and filing data for individuals, businesses and other taxpayers for the month of December 2016.